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ULIP vs mutual funds: which is the better investment option?

Nov 26, 2019 | 1 year ago | Read Time: 3 minutes | By iKnowledge Team
ULIP vs mutual funds: which is the better investment option?

The debate between ULIPs and mutual funds as investment options has been endless. Ever since the conception of ULIPs, these two investment options have been confusing investors. Unit Linked Insurance Plan, commonly known as ULIP, is a hybrid financial product that combines life insurance and market-linked investment. Thus, a portion of the premium you pay goes towards insurance, and the other portion is invested in capital and money markets, just like a mutual fund.  On the other hand, mutual funds collect money from investors and invest the money on their behalf.

ULIP is primarily an insurance product with the added benefit of market-linked investment. This investment aspect is often compared with other investment products, especially mutual funds. Let us have a look at some key features that also differentiate ULIPs and mutual funds to help you decide what’s right for you.

  • Allocation of funds-

While investing in mutual funds your entire amount goes to buying the respective units. The costs involved in mutual funds are fund management and administrative fees. On the other hand, purchasing ULIP, a certain portion of the premium goes towards administrative and mortality charges to maintain the insurance cover.  Thus, if you invest Rs. 20,000 in ULIP Rs. 8000 will go to would go towards the insurance cost and Rs. 12,000 would be invested in the market.

  • Durability of investment-

ULIP’s are kept for a period of 5 years. Hence, for five years your investment stays untouched. At the end of five years you get the compounded returns of the investment. But liquidity is higher in mutual funds where you can withdraw your funds whenever you want. However, you may be charged a fee for exiting within a year. Hence, to avoid any charges you should exit mutual funds plans after a year.

  • Flexibility-

Mutual funds have a pre-determined portfolio. You stay invested until you get your returns and exit the plan. Hence, you’re not allowed to exchange your plans. Most ULIP products offer you a range of funds to choose from. Even if you change your goals mid-way you have the option of changing your funds.

  • Level of Risk-

The level of risk in ULIP is comparatively very less than mutual funds. Although the premium is partly invested in equity/debt/hybrid funds, the investment is made with utmost care due to the protection aspect. Also, the insurer will pay you the higher the sum assured hence; you are not at a loss even if the investment plan doesn’t work. Mutual funds have a varying level of risk- low as well as high. It depends on the kind of mutual fund you invest in.

  • Return on investment-

With benefits like low risk and tax benefits, compared to Mutual funds, ULIP provides less Return on Investment. Following the basic mantra of investment, the higher the risk, the higher the return, ULIP cannot take high risks when it comes to insurance. Hence, you have to either choose between high returns and risk tolerance.

Hence, if you’re looking for a long-term benefit with primary focus on insurance, ULIP is the plan for you. But if you’re in for short term period benefits then Mutual funds has a variety of options to choose from too. As it is said, insurance is not investments. They both have different aims and motives. The primary goal of insurance is to provide protection while Mutual Funds are for wealth maximisation. Depending on your goals you can choose between the two and yet earn maximum benefit out of them.

How does Aegon help?

While choosing the right option for your family’s safety you might do a lot of research. Aegon Life Insurance gives you a complete package of the best financial plans to choose from. We have a rich history when it comes to ULIPs and our priority is to pay heed to our customer’s needs. We offer the most popular and diligently designed products with comprehensive risk coverage and progressive fund choices. To know about Aegon Life Insurance products like term insurance and other products, visit our home page.

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